Articles - Does transferring have to be a stark all or nothing decision

Could trustees help members by introducing a ‘partial transfer’ option, avoiding a stark all-or-nothing transfer decision. It is well known there is still a high level of interest in transferring out of defined benefit (DB) schemes in the UK. A number of factors are driving this interest, including historically high transfer values and the introduction of Freedom and Choice in 2015, which gave greater flexibility to members of defined contribution (DC) schemes.

By Mark Barlow, Senior Consultant, XPS Pensions Group

Although most members with a DB pension will prefer to stay where they are, there are a number of reasons why a member may wish to transfer. For example, they may want to re-shape their income to better suit their lifestyle or may wish to use their pension fund in inheritance tax planning.

A DB pension is often considered the ‘gold standard’ as it provides a guaranteed level of income for life, subject to one key risk – the continued existence of the employer. When transferring, the member gets additional flexibility but takes on a lot of extra risks, including investment and life expectancy. These are areas where most pension scheme members have little or no expertise. This is particularly concerning since, in many cases, members are taking these risks with one of the biggest assets they have.

Members transferring out of a DB scheme must now take financial advice if their transfer value is above £30,000. This will certainly help members to make an informed decision. However, financial advisers tell us that they often struggle to advise members to transfer as, although there might be compelling reasons to transfer, members cannot afford to take these risks with such a large asset.

Pension schemes can help members to avoid this all or nothing decision. Since 2006, it has been possible to offer a ‘partial transfer’, where the member only transfers a proportion of their benefits. However, it is estimated that only 15% of DB schemes currently make the option available. So why is this?

Unfortunately, DB pensions are very complex. Members earn a pension throughout their career that is made up of many different elements with different terms associated with each. This means that allowing members to transfer part of their pension can raise some complicated questions. For example, should members transfer certain elements of their pension first or the same proportion from each element? What limits should be set to ensure members do not make the option excessively costly for the scheme – e.g. by carrying out multiple partial transfers over a period of time or leaving a very small pension behind?

These are legitimate questions but not insurmountable problems. Partial transfers can be beneficial for members and are likely to result in more members transferring benefits out of the scheme (although perhaps not all of their benefits). An option that could be beneficial for members is positive for trustees, whilst the potential removal of additional liability and risk will be attractive to employers. Therefore, we believe that these issues can, and should, be overcome.

There will be short-term costs in setting up a partial transfer option – for example, legal costs of amending the scheme rules and adviser costs in designing the option. However, if the option is structured effectively, the overall costs of running the scheme in the long term can be reduced.

To read more about whether trustees could help members by introducing a ‘partial transfer’ option, please click here: